Piracy – ransom payments not contrary to public policy/recoverable as sue & labour under English Law

The subject of piracy has been the subject of much debate given the numerous hijackings off Somalia and elsewhere over the last 18 months or so.

As far as we are aware, none of these cases have resulted in any decisions in the English Courts until the recent decision from the High Court in Masefield AG v Amlin Corporate Member Ltd.

Amlin insured two parcels of cargo owned by Masefield AG on board the Bunga Melati Dua which was hijacked and taken to Somalia in August 2008. Some time after the hijack the insured tendered a Notice of Abandonment to insurers, claiming that at the time the Notice was given the cargo was a Actual Total Loss as they had become “irretrievably deprived” of the cargo (albeit that the cargo subsequently was recovered). It is noteworthy that the insured value of the cargo was in excess of $13m but when it was subsequently sold the net proceeds were about $7m, presumably leaving the claimant out of pocket to the tune of about $6m.

We therefore surmise that if the cargo owners had succeeded in showing they were irretrievably deprived of the cargo they could have claimed for the whole cargo value under the policy and subsequently give credit to underwriters for the sale proceeds leaving a net claim of about $6m. If they were not irretrievably deprived of the cargo then there was no claim for loss of cargo under the policy.

The relevant clause in the policy stated-

“No claim for Constructive Total Loss shall be recoverable hereunder unless the subject-matter insured is reasonably abandoned either on account of its actual loss appearing to be unavoidable or because the cost of recovering, reconditioning and forwarding the subject-matter to the destination to which it is insured would exceed its value on arrival”

The judge found at paragraph 18 of his judgement that “based on contemporaneous communications it was apparent that the vessel cargo and crew were likely to be released in short order”.

Additionally he stated that much was known about the modus operandi of the pirates, and we quote paragraphs 22 & 23 of his judgement-

“22. On 19th September 2008, the Claimant’s insurance broker, Swinglehurst, received a circular from Dolphin Maritime, which was forwarded to the Claimant on 23rd September 2008. Dolphin Maritime at that time stated that “We write in general terms because these cases tend to follow a pattern and also because our comments may be of assistance so far as possible future cases are concerned … The ship crew and cargo are taken to Somali waters and detained there. The hijackers then demand a ransom … Typically based on our knowledge the pirates ask for $3-4m and settle for a ransom of about $1-1.5m. The shipowners usually control the negotiations via their professional negotiators, and pay the ransom in the first instance … The negotiations usually take some time, between 6 & 8 weeks being the norm before the ship and cargo and crew are released. On the positive side, we are not aware of a case in the past with Somali hijackings where the ship and crew and cargo have not been released. The hijackers seems more interested in the ransom money than trying to sell the cargo or ship …”.

23. It was therefore evident that Somali pirates would demand a ransom and would release the vessel, cargo and crew upon payment. It was also likely that the ransom would be paid and that the vessel, cargo and crew would be released.”

Therefore the claim for Actual Total Loss failed.

Of perhaps more general interest are the comments made by the judge in respect of the payment of the ransom. Neither of the parties claimed the ransom payment was illegal, but the claimant argued that the payment of the ransom was contrary to public policy. The judge rejected this argument, stating “In these circumstances with no clear and urgent reason for categorising the activity as contrary to public policy the court should resist any temptation to enter the field in the manner suggested by the claimant.”

The judge also commented that to make the ransom payments contrary to public policy would cause kidnap & ransom cover to be unenforceable. He also stated that the payment of ransoms are recoverable as sue and labour expenses.

As you know, piracy still remains a real problem and we continue to be involved in a number of piracy cases (indeed we represented the largest cargo interest on the Bunga Melati Dua, although that cargo was not involved in the above case).

We hope you find the above of interest. If you would like a copy of the complete judgement please do let us know.

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